Re: We will never agree on this and therefore it is pointless to talk about!
 

The 20 is a big deal. 20 of 5% is only half of the 2, so it's hardly worth it. Also, since most of the subject assets are no longer AAA, that's another set of potential buyers shut out.

But, the current holders definitely have no incentive to sell at current offers, unless they have much more pessimistic models of future defaults; they'd be giving away all the upside for no meaningful benefit. The payment stream--even reduced--is still postive, monthly, cashflow.

Re: We will never agree on this and therefore it is pointless to talk about!
 

No. I am saying that there isn't a market price. My way doesn't require a conclusion about who is right. Your's does.

We aren't talking about houses. We are talking about bonds. But maybe your analogy can help. No one is arguing that lots of houses are totally worthless. That's because they have replacement costs and can oftern be rented for income. Which means there is a floor for their value that makes it wrong to value them at nothing.

Re: We will never agree on this and therefore it is pointless to talk about!
 

Apparently an old-skool one at that.

Re: We will never agree on this and therefore it is pointless to talk about!
 

I think the present situation is the result of an overreaction to the previous overreaction.

Re: We will never agree on this and therefore it is pointless to talk about!
 

The counterpoint on that is that, as I understand it, foreclosed houses still owned by lenders are generally held on their books at the FC auction sale price--which is usually the full amount of the unpaid first mortgage, plus penalties and costs. This value isn't anything like the much lower price the lender will get from a willing buyer at resale.

It isn't anything like the bond analysis, tho, as an REO house is just a continuing money drain on the lender until it's sold--it accrues taxes and, if not maintenance, security costs.

Re: We will never agree on this and therefore it is pointless to talk about!
 

You are still ignoring the fixed income nature of the assets. They are producing revenue streams.

For the fourth or fifth time.
 

I agree they shouldn't be valued at nothing.

Re: We will never agree on this and therefore it is pointless to talk about!
 

I'm OK with Gene Robinson, if that's what you mean.

Re: We will never agree on this and therefore it is pointless to talk about!
 

Which explains why there was never a real estate bubble, right?

Re: We will never agree on this and therefore it is pointless to talk about!
 

Please refer to my various other posts in which I expressly referred to those revenue streams.

Re: We will never agree on this and therefore it is pointless to talk about!
 

No, it helps explain why there was a bubble.

Re: We will never agree on this and therefore it is pointless to talk about!
 

Yes, but you keep inserting "reliable," which either means you argee with TM (whose proposal was sound in my view), which you don't seem to bedoing, or something else.

Re: We will never agree on this and therefore it is pointless to talk about!
 

There was a bubble because Wall Street is really smart and didn't overinvest in mortgage related assets?

Re: For the fourth or fifth time.
 

Then we're in agreement. It's just a question of determining a prudent valuation formula, as their is no present market. I'll go with the one TM offered.

Re: We will never agree on this and therefore it is pointless to talk about!
 

And then insisted that if there is no buyer offering to pay for the underlying asset, the asset must have no market value, and thus should be held on the books at $0, because of a fear of a lack of transparency.

If a bank held only assets with a MTM value of zero, but which produce a revenue stream of $10mm/month, how does the use of MTM aid in the transparency of the entity? Even if the model in 2006 said the assets should be producing $25mm/month, the bank has some reasonable level of capital based on the assets, but b/c of MTM, they only have capital equal to the cash on hand.

Sure there is a continuing default risk, which is still higher than the '06 model, but MTM is more distortional and opaque than an alternative system. No one here is suggesting a return to mark-to-model w/o adjusting for current circumstances, but MTM is exaggerating the decrease in values, just as it can exaggerate any increase in values.

Re: We will never agree on this and therefore it is pointless to talk about!
 

If you're holding an asset with a stream of payments due to you, and you think it is worth x, but no one wants to pay you x for it, you have to ask why. If you think it is worth x because that is how you value the future payments, taking into account the risk of default, etc., but the market doesn't seem to agree, you seem to have a problem. If there really isn't a market because these assets haven't ever been traded, then maybe you don't have a problem. But if there was a market, and your valuation of x is based on the prices others were willing to pay last year but aren't now, perhaps because they're no longer so leveraged or because they've started paying attention to the problems with ratings, you probably do have a problem.

Re: We will never agree on this and therefore it is pointless to talk about!
 

The who rode the bubble up made money doing so, and the people who thought it would be a bubble and invested accordingly often got killed. My point: There is a lot of rationality in the way bubbles work.

Re: We will never agree on this and therefore it is pointless to talk about!
 

Which fits the old saw "the market can stay irrational longer than you can stay solvent". There's a lot of irrationality in the way bubbles work, too--dumb money chasing smart money, etc.

Re: We will never agree on this and therefore it is pointless to talk about!
 

I missed the post where I said "value at zero" -- I must have been distracted by all my other posts where I said differently -- so perhaps you could point it out to me.

Once again: If they can be relied on to produce a revenue stream of $10mm/mo. then they certainly shouldn't be valued at zero.

Re: We will never agree on this and therefore it is pointless to talk about!
 

But right now, they are. No market, no value. Saying you're in favor of continuing to use MTM, but that you don't think revenue creating assets with no marketability right now should be marked to zero is self-contradicting.

Re: We will never agree on this and therefore it is pointless to talk about!
 

[emp. added]

Since I think we all agree that we can't have banks using a system of ad hoc valuation, if "market price" is the standard because it is the best measure, and market price is zero, how do you develop an exception to the standard that is not open to the abuse you are concerned about?

ETA: or what Sebby said.

Re: We will never agree on this and therefore it is pointless to talk about!
 

No no no no no. The fact that trading in a particular instrument is not happening does not mean it has no value. It does mean that the value the seller is assigning to it probably is too high.

If no house sells in my neighborhood for a month, it does not mean my house is worthless.

Re: We will never agree on this and therefore it is pointless to talk about!
 

THE FACT THAT PEOPLE AREN'T TRADING AN ASSET DOESN'T MEAN ITS VALUE IS ZERO. It means that buyers and sellers haven't agreed upon a price since they last agreed on a price.

Re: We will never agree on this and therefore it is pointless to talk about!
 

If you have a point, I no longer know what it is. There isn't a market for the assets we are talking about. Do you disagree?

Re: We will never agree on this and therefore it is pointless to talk about!
 

since you seem unable to articulate what you mean to anyone here, do you have value as an advocate?

Re: We will never agree on this and therefore it is pointless to talk about!
 

If there really isn't a market because these assets haven't ever been traded, then maybe you don't have a problem. But if there was a market, and your valuation of x is based on the prices others were willing to pay last year but aren't now, perhaps because they're no longer so leveraged or because they've started paying attention to the problems with ratings, you probably do have a problem.

Re: We will never agree on this and therefore it is pointless to talk about!
 

No, it doesn't necessarily. It may mean that the seller doesn't want to sell it. Just like your house.

Re: We will never agree on this and therefore it is pointless to talk about!
 

But is that what's happening here? Perhaps I'm working with the wrong assumption, but I thought nobody wanted this stuff at any price right now.

ETA: We could always assign it some value based on the price John Paulson, who is buying this stuff at the moment, is paying for it. Use that as a guide.

Re: We will never agree on this and therefore it is pointless to talk about!
 

The market says yes.

Re: We will never agree on this and therefore it is pointless to talk about!
 

No -- asset owners are unwilling to sell at the prices buyers are willing to pay, so no sales are happening. Except for the distressed buyers, who are compelled to take less. This then sets a new market price, which other owners don't want to mark to.

Re: We will never agree on this and therefore it is pointless to talk about!
 

But which you want them to mark to, and want to then have result in defaults under various agreements. Also, you'd like to see (or at least don't seem phased by) a variety of regulatory repurcussions to the sudden drop in capital resulting from this mark-to-a-nonexistent-market. Is that right?

Because the only reason the accounting is important is because of all the consequences we've tied to it.

Re: We will never agree on this and therefore it is pointless to talk about!
 

How about the Magic 8 Ball?

Re: We will never agree on this and therefore it is pointless to talk about!
 

Fine. Then you're fighting the hypo. Assume that the only potential buyer offers 25 bips ($2.5MM) on an $1B RMBS bond that has had 50% default, has a high risk of substantial future default, but is currently generating $25mm in annual cashflow. Assume another holder recently sold an RMBS bond (different issue) at this price, but publicly insists it is not distressed. How should we ask the bank to value that Bond?

eta: Keeping in mind 3G's point about the repercussions.

Re: We will never agree on this and therefore it is pointless to talk about!
 

Assuming that's the picture (not doubting you, but I'm not sure anyone can describe what's taking place in aggregate), wouldn't MTM merely serve to force banks to take massive losses they otherwise shouldn't due to temporary instability? If you make them hold something at zero which causes them to hoard money, which weakens the general economy, which in turn weakens them more, forcing them to eventually sell the artificially deflated assets at fire sale prices, haven't you done nothing more than preclude lending and frustrate every intent of the bailout while enriching vulture buyers? You're setting up a massive wealth transfer to a select group of savvy buyers, I'd say.

Why not do the converse and give the banks the room to breath, restart lending and let the immediate increase in economic activity bolster the economy, decreasing the foreclosures at the root of the mess?

ETA: Yes, I realize I just argued for govt interference against your argument for application of a more ruthless capitalist mechanism.

Re: We will never agree on this and therefore it is pointless to talk about!
 

I don't think the market is non-existent. I think that's the market we have now, and it's a function of investment in assets that are both performing worse and much less liquid than they were.

Cletus said above, among other things, that these assets are much less attractive to a variety of potential purchasers because they're less leveraged and different situated vis-a-vis bond ratings. In other words, there are significantly fewer buyers now. When that happens, assets are worth less.

Re: We will never agree on this and therefore it is pointless to talk about!
 

You have quite a future as an accountant, if you ever give up this law gig.

Re: We will never agree on this and therefore it is pointless to talk about!
 

This conversation is starting to become ridiculous. If the buyers are correct in their valuation, which you assume, then why are the banks acting so irrationally? Why don't they just sell these assets for their liquidation value and move on? Why are we trying to figure out a better valuation method?

Let me ask you this: In a bankruptcy, there are certain decisions to be made that are similar to the one we're talking about right now. Let's say you have lent to NetJets, they have defaulted and you have accelerated the loan and are looking at your options. Two of those options are: (1) declare bankruptcy and liquidate everything immediately at auction or (2) put in a little more money to operate the company with current management so you can sell the assets over time. If you have a bunch of airplanes and airplane parts and you elect to sell at auction, you're going to get fucked. This isn't the best time to be selling airplanes, the market is already very limited and knows you're screwed and you have to unload. Alternatively, if you maintain operations for awhile and have management sell assets here and there you will make much more money.

What's the value of the assets? According to you, it's always the fire-sale price. I go back to what I initially wrote and what I quoted. The market does not always know best. We are in that situation right now.

TM

Re: We will never agree on this and therefore it is pointless to talk about!
 

They don't want to sell at the price offered because they think the assets will be more valuable in the future than the market thinks they are today. That is an economic decision. However, what something is worth today is the answer the accounting treatment is trying to answer, and frankly, what is more relevant for the capital adequacy requirements, investor decision making, etc.

Re: We will never agree on this and therefore it is pointless to talk about!
 

You're cutting against your own argument. If the market knows that these assets are valued at $3 and you publicly albeit, erroneously, change the valuation method, according to you, the market has perfect information on where it should be valued and will account for that with a drop in the price of bank stock, right? Instead, watch as the market does the exact opposite when they trash mark-to-market valuation, which is just getting in the way.

TM

Re: We will never agree on this and therefore it is pointless to talk about!
 

There is a temporal problem here. A company's balance sheet answers what the worth of the assets are at a specific point in time, not what they will be worth some time in the future.